Utility-Scale Energy Storage Surges in Q1, While Behind-the-Meter Falters

The broader success of customer-sited storage will depend on the evolution of new value streams.

Photo Credit: Greensmith

The U.S. energy storage industry just had a very good start to the year. With 234 megawatt-hours of capacity deployed in the first quarter of 2017, installations grew 945 percent compared to the first quarter of 2016.

Growth in the utility-scale energy storage sector was more astonishing -- 5,040 percent. 

Still, there were only 4.3 megawatt-hours deployed in Q1 2016. But the statistic is impressive.

The front-of-the-meter segment drove 94 percent of new capacity deployed in the first quarter. And with a pipeline of 9,217 megawatts, it shows no signs of slowing down.

Behind-the-meter installations have slowed, however. Customer-sited storage amounted to 13 megawatt-hours deployed, down 28 percent from the same quarter last year. In megawatt terms, installations were down 32 percent.

Source: GTM Research / ESA U.S. Energy Storage Monitor

The trouble with incentives

Behind-the-meter storage remains highly concentrated in first-mover market California, with a particular reliance on that state's Self-Generation Incentive Program. That dependence took its toll last quarter.

SGIP, which gives rebates on behind-the-meter storage and other distributed energy assets, went through an overhaul last year. The new design gave storage more value over other distributed resources, so many developers canceled applications to the previous program and put plans on hold until the new disbursements began in May.

Because California dominates the overall market, this pause dragged down the nationwide deployment numbers. The tiny residential market held steady overall, but California's commercial storage slowdown overshadowed gains in Massachusetts, Hawaii and other states. This was the smallest quarter for commercial megawatts deployed since Q2 2015.

"There is always that 'gold rush' risk -- I think there's a lot to learn from that when folks are designing incentive programs," said GTM Research analyst Brett Simon.

In April, Michael O'Sullivan, senior vice president for development at NextEra Energy Resources, alluded to this problem at the Energy Storage Association's annual conference.

“Keep it away from being a tax-advantaged business,” he said. He advised against going down a path “where we all start spending a lot of time in Washington, D.C., asking for something.”

That was related to whether the industry should lobby for its own investment tax credit, but the logic applies to other government incentives as well. Too much reliance on finite grant programs creates boom-bust cycles, to the detriment of steady growth. (GTM's Simon says he expects a big rebound in the second half of the year, as the new SGIP deployments kick in.)

To solve this problem, regulators will need to reconstruct rates to encourage monetizable revenue streams.

A change will come

GTM Research analysts predict an inversion ahead. The behind-the-meter segment is on track to take a small lead from grid-scale storage by 2022, deploying more megawatts and earning more money. In energy capacity, the grid-scale sector maintains an edge.

Source: GTM Research / ESA U.S. Energy Storage Monitor

One key to growth will be distributed resource aggregation, so that residential and commercial storage can play a broader role in the grid. Several companies are doing this already; the applications today fall into the buckets of demand-charge management, resiliency/backup and grid and wholesale market services, according to the ESM report.

The last category, wholesale services, has the potential to really change the way the grid operates. So far, it's underway in a few places like Southern California Edison's 50-megawatt Preferred Resources Pilot program, and in pilots in New York and Hawaii.

One challenge is convincing utilities that they can trust a network of dozens or hundreds of units scattered across a service territory, with an external company saying it can call them up to deliver needed capacity on demand. 

My colleague Jeff St. John will grapple with that question at Grid Edge World Forum in a discussion on the rise of virtual power plants, featuring a group of leading thinkers from the distributed resource aggregation space. Later on, Elta Kolo of GTM Research will share strategies for successful "bring-your-own-device" demand response programs. Other GEWF panels will address the crucial question of how to compensate utilities in the role of platform provider, and the ways that distributed resources can serve utilities' needs as non-wires alternatives.

Harness the FOMO

The good news for the industry is that storage has already become a hot topic in grid conversations; the market is moving fast and policymakers and utilities across the country want a piece of it.

This speed of uptake is evident in the work of Arizona Public Service. After installing 4 megawatts of storage to test how it operates, the utility went ahead and proposed 503 megawatts of new storage in its 2017 Integrated Resource Plan.

"Moving from only 4 megawatts deployed to a plan for more than 500 megawatts shows how quickly pilot and feasibility assessment projects can spur energy storage investment at scale, and indicates that the value proposition for energy storage is crystallizing for utilities, particularly when considering long-term resource plans," the GTM Research analysts write in the report.

The analysts contextualize the growth of storage as a "FOMO" effect -- utilities and state leaders exhibit a fear of missing out on storage when others are doing it. Now that the market is growing in a handful of states, a second wave of states is following suit. 

Last week, within a year of Tesla's Gigafactory opening for business outside Reno, Nevada's legislature passed a barrage of storage market creation measures. The story of the next great American battery factory hasn't yet been written.

And last month, Green Mountain Power in Vermont announced it will install Tesla Powerwall units in customer homes for $15 per month. The customers get backup power in case a winter storm knocks out the grid, and GMP uses GridLogic software to aggregate grid services.

That project mixes customer benefits, utility compensation and multiple grid value streams into a powerful grid-edge cocktail that could revive the behind-the-meter storage sector after a tough quarter. While the sector faltered a bit in the beginning of the year, the use cases for behind-the-meter storage are expanding.

Join us at Grid Edge World Forum June 27-29 in the heart of Silicon Valley. We'll have three days of sessions that address virtually all facets of the grid edge. We'll have the most influential executives, entrepreneurs and analysts from across the energy sector to meet during unparalleled networking opportunities and exhibition. Come join the audience of global utilities, emerging startups and fast-growing industries like EVs and customer energy management. Learn more here.